Export Diversification and Growth

Why do some countries sail ahead on a steady stream of economic growth while others flounder? Or, in other words, why do some middle-income countries poised – like Chile – on the threshold of development never quite make it?

One theory, put forward by Ricardo Hausmann, the Venezuelan economist who heads Harvard University’s Center for International Development, is that this depends on the nature of their exports and the extent to which the inputs they require – technology, capital, institutions and skills – lend themselves to the development of new and more sophisticated products.

And there, he argues, Chile is at an important disadvantage both because of the composition of its export basket and the policy position it has – mistakenly, he says – espoused to the detriment of its future growth prospects.

So what, in your view, is Chile’s problem?

It’s inefficiently specialized in natural resources because it has been ideologically obsessed with not picking winners and not having an industrial policy. As a result, it has been very non-pragmatic in allowing its economy to remain highly concentrated in mining and agriculture.

But isn’t that just a result of an embarrassment of natural resources?

Other countries, like New Zealand, Australia, Canada and Norway, are much richer in natural resource endowment – defined as arable land and mineral and fuel exports per capita – but much more diversified in exports of non-primary goods and services.

But what about compared to other Latin American countries such as, say, Brazil or Colombia? 

Colombia and Brazil are much more diversified than Chile. Brazil exports shoes and airplanes while Colombia exports cars and textiles. Chile, in fact, ranks 18th out of the 21 Latin American countries in an index I developed with other researchers to measure the diversification and complexity of their export baskets.

And, if the reason isn’t an abundance of natural resources, what is it?

It’s a legacy of the influence of the Chicago school, reflected in the view that industrial policy should be narrowly targeted to market failure. Chile’s very modest use of monies from the mining royalty [to support the development of other industries] has, for example, been undone by the present government because of a picking-winners flavor it ideologically dislikes. Chile has a very effective industrial policy for the mining, financial services and agricultural sectors but has had a blatant disregard for the development potential of other parts of its economy.

What do you mean by industrial policy in these three sectors?

In forestry, in the 1980s, there were very industry-specific policies with high state subsidies and, in agriculture, there have been significant R&D efforts – in the case of salmon, for example – as well as the control of phytosanitary problems, certification and cluster development. In financial services, you have the use of workers’ pension savings and the allocation of those savings to specific assets, the creation of credit bureaus to ensure that banks can share information about their customers’ credit performance and so on.

And in mining?

Well, a large part of the country’s copper output corresponds to a state-owned enterprise and there’s also been very thoughtful reflection as to the specific property rights of mines, the industry’s infrastructure and logistics needs, its use of water and energy and its environmental impact. There’s a whole area of public-sector activity that creates the ecosystem this industry requires.

Chinese demand for raw materials and currency appreciation work against export diversification not only in Chile but also around Latin America…

Yes, the region is struggling with Dutch disease associated with the fact that primary exports are doing well because of demand from China. That’s making life harder for the diversification of the rest of the economy. Latin America can learn from Malaysia which also has significant exports of natural resources but has been able to maintain a highly diversified non-primary export base centered around electronics and machinery.

Is Chile suffering from Dutch disease?

I would credit Chile with having one of the most conscientious and, to some extent, successful policies to prevent Dutch disease. It is making very significant savings out of its copper exports and, within the limits of inflation targeting, the Central Bank has tried to limit the real appreciation of the peso.

There’s a view in Chile that industrial policy wouldn’t achieve much because of low educational attainment…

I definitely don’t share that view; it’s a red herring. Chile’s educational attainment is well above that of, say, Malaysia and that hasn’t prevented Malaysia from developing a highly sophisticated non-primary export sector. In fact, if you had those industries in Chile, the educational market would have responded to their needs. All countries would benefit from better education but I don’t think that’s where the problem lies.

So the one big constraint is a political mindset…

I think the binding constraint is a blatant disregard for diversification. One excuse offered is that Chile is a far-away place but so are Australia and New Zealand and they’re more diversified than Chile in non-primary exports and six times more diversified in services.

They had the Commonwealth…

But, geographically, they still don’t have near neighbors.

Are there sectors in which Chile has comparative advantages? Where ought it to be diversifying?

Comparative advantage is not something you have; it’s something you create. It evolves from the product you’re in to a related product. Chile is a country that, because of its resource-based export basket, would have benefitted particularly from having more industry-specific policies but has had a particular disregard for those policies.

So, crystal ball, where is Chile going to be in 20 years’ time? 

I wish the very best for Chile but its medium-term growth prospects are lousy. My sense is that, in 20 years’ time, its mineral capacity per capita will not have grown and will probably have dwindled and it will remember the present time as comparable to its nitrates boom. It’s being confused by the short-term benefits of temporary wealth and not necessarily building up the country for the future. It’s a sad story because Chile has been a leader and innovator in so many policy areas but this is one area it got very wrong.

So, in a way, Chile may have peaked…

Chile’s growth rate has been declining for some time and the recent acceleration is just a consequence of short-term fiscal inputs and earthquake-associated reconstruction. Its dynamism came from a burst of diversification in the 1980s but there haven’t been any new bursts of diversification since then.

Ruth Bradley is a freelance journalist based in Santiago and a former editor of bUSiness CHILE.